How to Fix a Transport Business Case for Rail – Part 1 Jack Up the Rail Option BCR

• The SKM Stage 3 Report recommended keeping the Johnsonville Line because no bus Scenario had a better Benefit Cost Ratio
• But the SKM Stage 3 Report recommended “Base Case” excluded the cost of buying any replacement EMU trains and other costs as well
• Excluding these costs hid that the Bus-On-Street Scenario had the best Benefit Cost Ratio

This post follows The North Wellington Public Transport Study (2006) which is the introduction this series of posts on “How to Fix a Transport Business Case for Rail” and will focus on how the “Do Minimum” Rail Base Case Benefit Cost Ratio was fixed in the SKM Stage 3 Report to help it come first.

The NWPTS Stage 3 Report states that no Scenario managed a BCR of 1.00 meaning that, compared to the Base Case BCR*, the Scenario costs were greater than the benefits for every option:

[*Note the SKM Stage 3 Report table 5-45 shows the Base Case BCR as “0.00” but this should be 1.00 because this is the ratio above which any Scenario will be deemed worth doing.]

It is for this reason that the SKM Stage 3 Report recommended the rail Base Case option be implemented as the basis for public transport services to North Wellington City. But the Base Case figures were fixed by jacking them up.

Technique A – Invalidly Increase the Rail Option Benefits

The SKM Stage 3 Report Base Case Benefits are defined a $0 essentially stating that the then Johnsonville Line rail service would continue without improvement.

There is really no opportunity to invalidly change the Base Case Benefits.

Technique B – Invalidly Reduce the Rail Option Costs

What were the Base Case Costs?

The SKM Stage 3 Report states that the Base Cast as $128M.  Looking into the SKM Economic Analysis Spreadsheet, this amount (rounded) can be traced to cell AI91 on worksheet “Notes” where it $127,880,514.81 which is the 25-Year NPV of the total cost column above:

You can see the Base Case is really made up of the following costs:

$4,927,600.00 – Rail Tunnel enlargement costs so the Ganz-Mavag trains can fit through the Johnsonville Tunnels (Year 3)
$10,500,000.00 – Refurbish 14 x Ganz-Mavag EMUs at $0.75M each (Year 4)
$42,000,000.00 – Purchase 14 x new EMUs to replace Ganz-Mavag at end-of-life at $3M each (Year 19)
-$16,800,000.00 – The Salvage or scrape value of the 14 x Ganz-Mavags
$3,644,533 plus inflation – Annual Rail Operating Cost for the 14 x English Electric EMUs on the Johnsonville Line (Year 1 – 3)
$4,023,859 plus inflation – Annual Rail Operating Cost for the Ganz-Mavag EMUs (Year 4 – 25)
$6,773,000.00 plus inflation – Bus Operating Costs for Northern Suburbs (Year 1 – 25)

So the Base Case is to:

1. Operate the 14 old English Electric EMUs for 3 more years
2. Enlarge the Johnsonville Line tunnels so the Ganz-Mavag EMUs can fit
3. Refurbish 14 Ganz-Mavag EMUs to replace the English Electrics from years 4 – 19
4. Purchase new EMUs in 2024 to replace the Ganz-Mavag EMUs in 2029.

Problem 1 – Where to get 14 Ganz-Mavag EMUs to Refurbish?

The Base Case included the cost of refurbishing 14 Ganz-Mavag EMUs (as they were already 25 year old) but Toll Rail did not have 14 spare Ganz-Mavag EMUs waiting to be used.  In fact not only were all Ganz-Mavag EMUs fully committed, but Tranz Metro rail also relied on another nine equally old English Electric EMUs for peak services on other lines.  So the 14 Ganz-Mavag EMUs needed to replace the Johnsonville Line English Electric EMUs can only be freed up by purchasing new EMUs.

The NWPTS Reference Group had already discussed the issue of whether the cost of scenarios using refurbishing Ganz-Mavags (ER3 & ER4) should be based on the cost of purchasing new EMUs. Everyone, including the GWRC and SKM, had already agreed with the Reference Group:

3. Refurbished vs New Units – It was agreed that in economic terms the two options were the same, both based on the marginal cost of a new unit
NWPTS Reference Group Minutes 1 May 2006

These minutes were taken by SKM and also recorded the presence of the lead representatives from both the GWRC and WCC.

This decision to cost in the purchase of new EMUs to replace the English Electrics is reflected in the Enhanced Rail Scenario consulted in the NWPTS Scenarios Report put to public consultation:

SKM Stage 3 Report reverses the decision to Cost in new EMUs

A major surprise in the SKM Stage 3 Report was the reversal of the decision to cost new units for both for the new Base Case and the Enhanced Rail Scenarios:

The SKM Stage 3 Report tries to justify not costing new EMUs as follows:

There is an argument that the initial economic cost of the refurbished rail units is actually the cost of purchasing new units. This is because new units would need to be purchased to run on the wider network to replace the refurbished units that would operate on the Johnsonville Line during the peak. This is not appropriate because the costs of new units would be attributed to the scenario but the trains would operate on other services and the benefits would accrue to other projects. These include:
<. . . .>
It would be unfair to assign the cost of these units to the Johnsonville Line without attributing their benefits. We also believe it is fair to assign the cost of a unit to the section of line where it will be operating, and the cost of a new unit should only be included if it is operating on the Johnsonville Line. These benefits to the wider network cannot be quantified here without undertaking a review of the whole rail network, but would be significant.
SKM Stage 3 Report G.2 Consider Economic Efficiency
Note: It is unclear to whom “we” refers, but its use throughout the report clearly implies this is the opinion of the report authors SKM.

Such reasoning is clearly wrong as there were no spare Ganz-Mavag EMUs and the project needed to purchase new EMUs for those lines already using them if Ganz-Mavag EMUs were to be diverted to operate on the Johnsonville line. The marginal cost for the base case clearly involves the purchase of new units. It is also of note that the SKM Stage 3 Report failed to state this was a major change in the treatment of this cost element previously agreed in the May 2006 and used by the earlier NWPTS Scenarios Report.

That the SKM Stage 3 Report quietly changed the cost basis of the Base Case and Enhanced Rail Scenarios from a cost model they had already agreed is a serious and apparently deliberate fixing of the Base Case Costs.

Although not included in the cost, the GWRC still purchased new EMUs for the Base Case

The GWRC decision to proceed with the Base Case recommended by the SKM stage 3 Report was made at the GWRC Passenger Transport Committee meeting of 16^th November 2006. The GWRC NWPTS Report 06.649 recommended:

6. Recommendations

That the Committee:

1. Receives the report;
2. Notes the content of the report;
3. Agrees that the base case, being the minimum investment to retain the rail service and incremental improvements to bus services and bus priority measures, represents the best option for the provision of passenger transport services in the northern suburbs;
4. Agrees that no further consultation be undertaken regarding the North Wellington Public Transport Study; and
5. Agrees that the study outcomes be communicated in accordance with section 5 above.

However, it should be noted that the minutes of this meeting on the actual decision is:

Passenger Transport Committee
Minute extract from meeting held on 16 November 2006
North Wellington Public Transport Study

Resolved

That the Committee:

1. Receives the report.
2. Notes the content and conclusions of the North Wellington Public Transport Study.
3. Agrees that the purchase of the twelve addition EMU carriages therefore proceeds, and also that arrangements for the alteration of the tunnels proceed as outlined in the report.
4. Agrees that no further consultation is required regarding the North Wellington Public Transport Study.
5. Agrees that the study outcomes be communicated in accordance with section 5 above.
(Bold added for emphasis)

So, at the same time the GWRC accepted the report recommendation for a Base Case Option that excluded the cost of new EMUs, the GWRC PT Committee also added authorisation to purchase 12 new EMUs!  The minutes do not include any reference to who or on what basis the purchase 12 new EMUs worth perhaps $36 Million was added to their NWPTS decision.

It is clear that the GWRC itself recognized that new EMUs must be purchased to enable the NWPTS recommendation to be implemented and this shows excluding these from the Base Case cost used in the SKM Stage 3 Report is clearly wrong.

The effect of fixing the Base Case cost to the SKM recommendation

We know the cost of purchasing new EMUs was $42M ($3M per EMU) because this was already in the 2005 GWRC Long Term Community Council Plan (LTCCP) and in the SKM Analysis Spreadsheet as Scenarios such as “ER1 (New Units)”.  Changing the Base Case and Rail Scenarios from Ganz-Mavag Refurbishment Cost of $10.5M to the $42M true cost for replacement EMUs for this option makes the Base Case NPV Cost increase from $127M to $146M. Here is the revised BCR Table:

Fixing this possibly deliberate error results in the Bus-On-Street Scenario becoming the recommended option … which is a problem for trying to justify retaining the Johnsonville Rail Service.

Problem 2 Why is the Base Case Risk $ZERO?

The cost of each Scenarios is made up of two cost components:

• The Service Provider Costs – NPV of the 25 year cost of the Scenario
• Risk Cost

Section 4.7 of the SKM Stage 3 Report describes the risk approach and criteria.  It also outlined the results of the risk analysis across the ‘Base Case’ and Scenarios (bold added for emphasis):

The two rail scenarios perform in a similar way to the base and each other, having the best overall score which is similar to the base case risks. Bus on-street performs the next best having a moderately negative impact. The major risks for the bus on-street scenario are associated with failure to meet community expectations, resulting under demand for the services, and difficulties interfacing with existing infrastructure through the CBD.
<…>

The SKM Stage 3 Report Appendix H documents the detailed analysis of the risks for each Scenario and the Base case including the following table:

Note that the Base Case has the same Financial Risk as the Rail Scenarios. This is logical because the risks associated with the Enhanced Rail (ER1) would also apply to a Base Case that is essentially the ER1 Rail Option but not purchasing extra carriages.

However, inside the SKM Spreadsheet used to calculate the Base Case cost used in the Benefit Cost Ratio, SKM have deleted the risk cost for the Base Case outlined in Table 5-55:

So SKM simply removed the Base Case Risk Cost stated in the Risk Analysis Appendix of the same report from the calculation of the Base Case cost without highlighting or explaining this in their report. They only stated this is an assumption:

The base case was developed for comparison of the proposed scenarios and did not include an allowance for risk.
SKM Stage 3 Report section G2 G.2 Consider Economic Efficiency (Bold added for emphasis)

The effect of this error on the SKM recommendation

We know the cost of risk cost of ER2 and ER2 in the BCR table is $19,300,910.  Also adding this to the Base Case Service Provision cost makes the Base Case NPV Cost increase from $127M to $147M. Here is the revised BCR Table:

Fixing this possibly deliberate error results in the Bus-On-Street Scenario becoming the recommended option … which is a problem for trying to justify retaining the Johnsonville Rail Service.

Having identified two significant fixes to the Base Case Costings, the next post will focus on what the SKM Stage 3 Report did to fix the figures of the Bus-On-Street and other Scenarios.